What happens to my credit after bankruptcy?

How long it stays on your report

A Chapter 7 bankruptcy is reported for ten years from the filing date. A Chapter 13 is reported for seven years from the filing date. The two-clocks story, why scores recover long before the entry disappears, is covered in How long does bankruptcy stay on my credit report?. The accounts included in the bankruptcy should be updated to show a zero balance and a notation that they were discharged. If they keep showing a balance after the discharge, that is a reporting error you can dispute.

What happens to your score

If you are current on everything when you file, your score will drop, sometimes substantially. If you have been missing payments for months, your score is probably already low, and the bankruptcy may not move it much. In either case, the pattern afterward is the same: the bankruptcy’s effect on the score shrinks every year, and new positive history starts to outweigh it.

Most people see meaningful improvement within twelve to twenty-four months of the discharge if they use credit carefully. Part of the reason is mechanical. After a Chapter 7 discharge, you have no unsecured debt, your debt-to-income ratio is dramatically better, and you cannot file another Chapter 7 for eight years, which lenders know.

Getting a car loan

Lenders will finance a car shortly after a Chapter 7 discharge, sometimes within weeks. The interest rate will be high at first. A modest loan, paid on time, is one of the fastest ways to rebuild. In Chapter 13, you need permission from the trustee or the court to take on new debt during the plan, which is routinely granted for a reasonable vehicle.

Getting a mortgage

Waiting periods are set by the loan program and run from the discharge date, not the filing date.

• FHA: two years after a Chapter 7 discharge. In Chapter 13, you can qualify after one year of on-time plan payments with court permission, or shortly after discharge.
• VA: similar to FHA.
• Conventional (Fannie Mae and Freddie Mac): four years after a Chapter 7 discharge, or two years with documented extenuating circumstances. Two years after a Chapter 13 discharge.

These are program rules and change occasionally. Individual lenders can add their own requirements.

Renting

Landlords who pull credit will see the bankruptcy. Many do not care, especially if your income is stable and the rest of your report is clean. Some will ask for a larger deposit. A short, factual explanation helps more than an apology.

How to rebuild

• Follow the rebuilding answer in this section for the month-by-month version. The short form: get a secured credit card or a credit-builder loan from a bank or credit union, use it lightly, and pay it in full every month.
• Keep any accounts that survived the bankruptcy current, such as a mortgage or car loan you kept.
• Check all three credit reports a few months after discharge and dispute any accounts still showing a balance.
• Do not pay a credit repair company. Nothing they can do for a fee is something you cannot do yourself.
• Avoid the flood of high-rate credit offers that arrives after a discharge. Lenders send them because they know you cannot file again soon.

Chapter 13 and credit

During a Chapter 13 plan, your credit is in a holding pattern. You are making payments, but most lenders will not extend new credit without court approval. The upside is that the plan is reported for a shorter time, and the discharge arrives with three to five years of demonstrated payment history behind it.